As we make our way through a slow spring 2020, new listing inventory is emerging as a key component in California’s housing market.

Inventory for sale is near a record low, with just 74,100 homes for sale in California in March 2020, according to data from Zillow. This is down 23% from 96,700 homes on the market a year earlier.

Reports show a steep decline in new listings in March, falling as much as 38% in a single month in San Francisco and 19% in Los Angeles. In a healthy housing market, a decline in new listings results in a lower for-sale inventory. However, homebuyers are taking a step back from the housing market this spring as they take the wait and see approach to the economic effects of the coronavirus (COVID-19). Thus, the actual for-sale inventory may actually rise in the coming months, despite many would-be sellers choosing caution over selling.

The situation varies significantly by metro. For instance, inventory in San Jose is up 20% from a year earlier as of March 2020. For-sale inventory is up 13% in both San Diego and Sacramento. However, total inventory is 1% lower than a year earlier in Los Angeles and 8% below a year earlier in San Francisco.

Chart update 05/28/20

Mar 2020 Mar 2019 Annual change
California home inventory for sale 74,100 96,700 -23%

Here in California, homes typically leave the market more quickly than in more stable markets.

This is reflected in the average number of days a home sits on the market in California before being snatched up by eager buyers. During 2019, the average number of days a home sat on the market before selling or being withdrawn was 66 days. This is up from 62 days in 2017, when the average-days-on-market was shortest, according to date from Zillow.

This supply-demand imbalance has pushed home prices higher in recent years, even in 2018-2019 when interest rates were still rising. Average California home prices were 3%-5% higher in 2019. As homebuyer demand takes a break in spring 2020 with the economic pause caused by COVID-19 shelter-in-place orders, expect home prices to pause, also. The only complicating factor is falling interest rates, which have temporarily boosted buyer purchasing power. If the Federal Reserve (the Fed) goes negative in 2020, expect home prices to receive another boost.

The cure for the inventory shortage

While supply and demand are momentarily disrupted in 2020, when the dust settles and economic progress returns (a recovery not likely to occur until 2022-2023), the inventory shortage will rear its head again. There are only two reasonable possibilities to cure California’s long-term inventory imbalance and general housing crisis:

  • decreased demand, via a reduction in the number of homebuyers; or
  • meeting current demand with more new construction.

The years beyond 2020 will see a bit of both.

2020 is experiencing the triple whammy of a pandemic, recession and financial crash. Renters and homeowners alike are unable to make payments due to lost jobs and income. Government efforts to avoid mass evictions are keeping individuals housed, for now. But once the pandemic response subsides and the economy begins to find its footing, all of these missed payments will need to be repaid. The combined catch-up on housing payments will set back would-be homebuyers by years. Meanwhile, inventory will continue to swell as even homebuyers with sufficient income and ability wait on the sidelines for confidence in the economy to improve and prices to drop.

On the other hand, residential construction is due to increase, and soon.

Homeowner and rental vacancies are both near historic lows in California. Whenever vacancies decline, construction is sure to rise to meet demand. But construction has been hampered during this long recovery from the 2008 recession due to strict and limiting zoning laws in California’s metro areas. To that end, several pieces of new legislation have passed since 2017 focused on providing more inventory to combat the housing shortage. These legislative changes include paving the way for smoother permitting and looser zoning laws.

Related article:

Legislative steps toward more affordable housing